|
|
Home
| Databases
| WorldLII
| Search
| Feedback
High Court of New Zealand Decisions |
Last Updated: 22 May 2018
|
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-Ā-TARA ROHE
|
|
CIV-2017-485-191
[2018] NZHC 816 |
|
BETWEEN
|
THE MALTHOUSE LTD
Plaintiff
|
|
AND
|
RANGATIRA LTD
Defendant
|
|
Hearing:
|
19&20 March 2018
|
|
Appearances:
|
H McIntosh and H MacFarlane (19 March only) for Plaintiff S Gollin and J
Standage for Defendant
|
|
Judgment:
|
27 April 2018
|
JUDGMENT OF CHURCHMAN J
[1] Tuatara Brewing Company Ltd (“Tuatara”) was incorporated on 8 December 2000. The prime movers behind the company were enthusiastic brewers Sean Murrie (“Mr Murrie”) and Carl Vasta (“Mr Vasta”).
[2] The major shareholders in Tuatara were Mr Murrie’s company, The Malthouse Ltd (“TML”), and Mr Vasta’s company, Vasta Brewing Company Ltd (“VBC”).
[3] The company had six other smaller shareholders all of whom were friends of Mr Murrie and Mr Vasta. They held the shares in their individual names in various amounts.
[4] Tuatara prospered over the first decade of its existence but by 2010 the shareholders realised that, in order to develop their business further, the company needed a significant capital investment.
THE MALTHOUSE LTD v RANGATIRA LTD [2018] NZHC 816 [27 April 2018]
[5] Over the period 2011-2013, the shareholders had discussions with several potentially interested parties.
[6] As an up and coming participant in the burgeoning craft beer industry, Tuatara was an attractive investment proposition. The shareholders had a number of options available to them including private equity investment, partnering with other brewing businesses or even selling out to a major brewery.
[7] However, not all of the potential options were equally attractive to the shareholders. There were disadvantages in being perceived in the marketplace as being controlled by one of the major brewing companies. There was also a disadvantage perceived in permitting investment by an investor in return for granting exclusive distribution rights to the investor.
[8] The ideal investor was one from outside the industry who could add value in the form of governance expertise.
[9] Rangatira Ltd (“Rangatira”) is a successful and substantial private equity investor. According to the oral evidence of Christopher Bradshaw (“Mr Bradshaw”), the company has equity of some $240 million. It had the major attributes that the shareholders were looking for in an equity investor and none of the disadvantages.
[10] In September 2012, Rangatira was approached by the lawyer acting for Tuatara about the possibility of becoming an equity investor.
[11] However, although Mr Murrie on behalf of the Tuatara shareholders, and Mr Bradshaw and Ian Frame (“Mr Frame”) on behalf of Rangatira had discussions, nothing came of them because the shareholders wanted a higher price than Rangatira assessed the shares in the business as then being worth.
[12] Tuatara was in active discussions at this time with at least one other potential investor. That entity was prepared to offer substantially more than Rangatira for the 35 per cent shareholding on offer.
[13] However, there were some features of this offer that were unattractive, particularly to the minor shareholders in Tuatara. These were the fact that the company involved was a major industry player, the association with whom some of the shareholders thought might have negative connotations for the Tuatara brand, and the offer also involved Tuatara surrendering distribution rights to the proposed investor.
[14] After negotiations with the other parties did not lead to a concluded agreement, Tuatara’s solicitor again approached Rangatira in March 2013. Rangatira remained interested and negotiations recommenced.
[15] The main sticking point in the negotiations was what Tuatara’s business was worth.
[16] Rangatira took a cautious approach to valuation of the business. Their estimate of value appeared to be based on historical and anticipated earnings and they used a conservative EBITDA multiplier. EBITDA refers to earnings before interest, taxation, depreciation and amortisation. They valued the company at no more than $10 million.
[17] The shareholders of Tuatara took as their reference point the $16.6 million figure that they had been offered by the large industry player but which the shareholders had rejected as a result of concerns relating to issues other than the dollars on offer.
[18] They were also influenced by their knowledge of much higher EBITDA multipliers that had been achieved by similar start-up breweries, including some in Australia.
[19] However, unlike the situation some six months previously when negotiations had broken down completely because the parties were unable to agree on the value of the business, the parties were able to come up with a mechanism that satisfactorily addressed the different views on the value of the company.
[20] Both parties acknowledged that the business was growing. There was a common expectation that the business would generate EBITDA of some $2 million in
approximately a year’s time. The Tuatara shareholders were even more optimistic than that and anticipated that, within such a timeframe, the EBITDA would be
$2.3 million.
[21] However, it was disagreements about the interpretation of the terms the parties included in their agreement to address the issue of valuation that have led to this case.
The agreement
[22] On 27 March 2013, Tuatara’s lawyer sent Rangatira a number of draft agreements including a document called an “Investment Agreement” (“the agreement”) which provided for Rangatira to acquire 35 per cent of the issued shares in Tuatara. The agreement achieved the dual objectives of the shareholders in Tuatara (“the shareholders”) of allowing them to receive some cash for part of their equity in the company and also providing for an injection of working capital. In return for a payment that was to be split between the shareholders and the company, Rangatira acquired 35 per cent of the issued shares in Tuatara.
[23] The agreement contained a provision commonly referred to as an “earn out” clause. The sum of $3.5 million was immediately payable upon settlement for the 35 per cent shareholding. The agreement defined $2.722 million (plus GST if any) of the sum as the “Initial Purchase Price” (and that sum was payable to the shareholders) and $778,000 (plus GST if any) was defined as being the “Initial Subscription Price” (payable to the company).
[24] The agreement provided for payments referred to as “Contingent Payments”. “Contingent Purchase Price” was defined as meaning $778,000 (plus GST if any) and “Contingent Subscription Price” meant $222,000 (plus GST if any).
[25] In the agreement, immediately after the definitions of Contingent Purchase Price and Contingent Subscription Price, there was a definition called “Contingent Sunset Date” which was said to mean “31 December 2015 or such other date agreed in writing by the Purchaser and the Vendor Representatives”.
[26] The operative clause which dealt with the Contingent Subscription Price and the Contingent Purchase Price was cl 9.
[27] The text of cl 9.1 read:
EBITDA Hurdle: The
9.1.1 Contingent Subscription Price shall be payable to the Company in immediately available funds; and
9.1.2 Contingent Purchase Price shall be payable to the Vendors in immediately available funds,
within seven (7) days of the Company, the Purchaser and the Vendor Representatives agreeing, or it being determined pursuant to this clause 9, that the Company has met the EBITDA Hurdle, provided that the EBITDA Hurdle is met on or before the Contingent Sunset Date. For clarity, it is acknowledged that determination of whether the EBITDA Hurdle has been met need not necessarily occur prior to the Contingent Sunset Date.
[28] The agreement specified the “trigger” events that would result in the Contingent Subscription Price being payable.
[29] The definition section of the agreement said:
EBITDA Hurdle means when the EBITDA of the Company for any consecutive 12 calendar month period exceeds, in aggregate for that period,
$2,000,000.
[30] The final subclause in cl 9 of the agreement was cl 9.8. This clause provides:
Exit event: If an Exit event occurs which actually or by implication values the Business of the Company at greater than $12,000,000, then the Contingent Payments shall become immediately due and payable.
[31] Clause 9.8 had been inserted in the original draft of the agreement by the shareholders’ lawyer. The original draft had contained, at the end of cl 9.8, the following words that were absent from the final draft:
[Drafting note: Not anticipated but inserted for completeness.]
[32] The EBITDA Hurdle was not achieved by the Contingent Sunset Date. While there was no dispute at the hearing that the EBITDA Hurdle had not been met, it is clear that the shareholders felt that they had been hard done by and they were of the
view that, had there not been a change in accounting practice in relation to the valuation of stock, the EBITDA Hurdle of $2 million should have been achieved and they would have been entitled to be paid the Contingent Purchase Price and the company paid the Contingent Subscription Price.
[33] Although the non-achievement of the EBITDA Hurdle was clearly a source of ill feeling for the shareholders, it is not a matter that directly impacts on the issues for decision in this case.
[34] In November 2016, almost a year after the Contingent Sunset Date had passed and nearly three and a half years after the agreement had been executed and the Initial Purchase Price and Initial Subscription Price paid, Tuatara entered into negotiations for the sale of 100 per cent of its shares to DB, a major industry player, and an agreement for sale of 100 per cent of Tuatara’s shares was completed on 31 January 2017.
[35] In January 2017, shortly before the completion of the agreement for the sale of all of Tuatara’s shares, a dispute between the parties arose as to whether or not that sale of shares was an “Exit event” in terms of cl 9.8 obliging Rangatira to pay the Contingent Subscription Price and Contingent Purchase Price.
[36] There is no doubt that the shares were sold for substantially more than
$12 million. The issue was whether or not cl 9.8 had expired on the Contingent Sunset Date or whether the clause continued to apply because it was not subject to the Contingent Sunset Date.
[37] In order to facilitate the sale of the shares, the shareholders in Rangatira entered into two related amending deeds on 20 January 2017. The effect of these deeds was that Tuatara was removed from the Contingent Payments issues (so as to avoid the possibility of the acquirer of 100 per cent of the shares being entitled to receive the Contingent Subscription Price from Rangatira). The Contingent Subscription Price was reduced from $222,230.94 to $142,444.48 and it was agreed that if Rangatira was held liable by the court to pay the Contingent Subscription Price and Contingent
Purchase Price then the Contingent Subscription Price (previously payable to Tuatara) would be payable to the shareholders instead.
[38] Rangatira’s total potential liability, if the two contingent payments were found to be payable, was agreed to be $920,282.66.
Litigation history
[39] The plaintiff initially sought summary judgment on its claim against Rangatira. That application was refused by Associate Judge Smith in a judgment dated 31 August 2017. He found that it was reasonably arguable for Rangatira that no “Exit event” had occurred.
[40] TML sought leave under s 56(3) of the Senior Courts Act 2016 to appeal that decision.
[41] By judgment dated 11 December 2017, leave to appeal was refused.
[42] A fixture for the hearing of this matter was allocated for 19 March 2018.
[43] The availability of the early fixture obviated the need for TML to pursue an application direct to the Court of Appeal for leave to appeal Associate Judge Smith’s decision declining the summary judgment application.
Legal issues
[44] The central legal issue was whether or not cl 9.8 was impliedly subject to the Contingent Sunset Date and ceased to have any effect once that date had passed.
[45] There was a contested issue of fact between the parties as to whether or not there was any prior discussion between the parties about the possibility of Rangatira selling its Tuatara shareholding before the Contingent Sunset Date, and therefore before Tuatara might have had the chance to earn the earn-out payments, with Rangatira witnesses asserting that there were such discussions and the TML witnesses denying them.
[46] TML asserted that there was no ambiguity on the face of cl 9.8; there were no alternative interpretations of the words available on the face of the clause and that the words did not suggest or include any technical or specialist terms or meanings, or industry background or context. It said that the clause operated fully within itself.
[47] TML argued that there was no express reference anywhere in the document to cl 9.8 being limited to the Contingent Sunset Date and distinguished cls 9.1 and 9.7 in that regard.
[48] It was noted that the anti-dilution clause (cl 10) did refer to the Contingent Sunset Date and it was submitted that the logical inference of this was that, by including reference to the Contingent Sunset Date in cls 9.1, 9.7 and 9.10 but not doing so in cl 9.8, the parties must have thought about the issue and did not intend that the Exit event would be subject to the Contingent Sunset Date.
[49] TML submitted the background evidence established that the words used in cl 9.8 had no special meaning and did not import other meanings or terms.
[50] TML suggested that much of the evidence of Rangatira’s witnesses was irrelevant and therefore inadmissible because it set out what the witnesses subjectively intended or understood the words in cl 9.8 to mean, or what TML’s negotiating stance was, before the clause was drafted.
[51] TML claimed that their interpretation of cl 9.8 did not lead to a result for one party so commercially absurd that the agreement overall made no sense.
[52] Rangatira’s position was that because the parties could not agree on the value of Tuatara and therefore the price Rangatira should pay for the 35 per cent shareholding, they used the tool of an “earn-out” clause. They submitted that a company’s value was always dependent upon its likely projected performance in the near future and that an earn-out clause was the mechanism of ascertaining the value of the company based on its financial performance. They submitted that the entitlement to the Contingent Payments was directly related to the value of the company being confirmed by its financial performance.
[53] Rangatira submitted that in order to interpret cl 9.8, the Court should follow the approach of having regard to the factual matrix and purpose of the clause.
[54] Rangatira’s submission was that the proper interpretation in light of the context and purpose of the Investment Agreement as a whole was that the Contingent Payments were only payable if the EBITDA Hurdle was met or Exit event occurred before the Contingent Sunset Date.
[55] Rangatira advanced an alternative argument that such a term should be implied so that the mechanics of payment in the timeframes specified in cls 3.5 and 4.5 (the Contingent Sunset Date) applied to the Exit event in cl 9.8. It was submitted that this implied the term was necessary for business efficacy and/or was so obvious that it went without saying because otherwise there would be no payment mechanism for the Contingent Payments.
The law
[56] A good starting point in understanding the approach to take to the interpretation of written commercial contracts is a decision of the Supreme Court in Firm PI 1 Ltd v Zurich Australian Insurance Ltd.1 Arnold J, delivering the joint judgment of McGrath, Glazebrook and Arnold JJ, said:
[60] ... It is sufficient to say that the proper approach is an objective one, the aim being to ascertain “the meaning which the document would convey to a reasonable person having all background knowledge which would reasonably have been available to the parties in the situation in which they were at time of the contract.2 This objective meaning is taken to be that which the parties intended.3 While there is no conceptual limit on what can be regarded as “background”,4 it has to be background that a reasonable person would regard as relevant. Accordingly, the context provided by the contract as a whole and any relevant background informs meaning.
[61] The requirement that the reasonable person have all the background knowledge known or reasonably available to the parties is a reflection of the
4 Subject to the exception in relation to evidence of pre-contract negotiations.
fact that contractual language, like all language, must be interpreted within its overall context, broadly viewed. Contextual interpretation of contracts has a significant history in New Zealand, although for many years it was restricted to situations of ambiguity.5 More recently, however, it has been confirmed that a purposive or contextual interpretation is not dependent on there being ambiguity in the contractual language.6
...
[63] While context is a necessary element of the interpretive process and the focus is on interpreting the document rather than particular words, the context remains centrally important. If the language at issue, construed in the context of the contract as a whole, has an ordinary and natural meaning, that will be a powerful, albeit not conclusive, indicator of what the parties meant. But the wider context may point to some interpretation other than the most obvious one and may also assist in determining the meaning intended in cases of ambiguity or uncertainty.
[57] As to what evidence may be admissible as an aid to the interpretation of a contractual term, it is clear that subjective evidence of the views of a party as to the purpose or meaning of a particular provision is not admissible.
[58] In Vector Gas Ltd v Bay of Plenty Energy Ltd, Tipping J said:7
[29] There is no problem with objective evidence directed to the context, factual or linguistic, in which the negotiations were taking place. That kind of evidence can properly inform an objective approach to meaning. Whereas evidence of the subjective content of negotiations is inadmissible on account of its irrelevance, evidence of facts, circumstances and conduct attending the negotiations is admissible if it is capable of shedding objective light on meaning. It is often said in contract interpretation cases that evidence of surrounding circumstances is admissible. Circumstances which surround the making of the contract can operate both before and after its formation. In either case irrelevance should be the touchstone for the exclusion of evidence.
[59] The Court of Appeal in E&E Developments Ltd v Housing New Zealand Ltd
also endorsed the comments of four of the five Judges in Vector Gas Ltd and held that
7 Above n 6.
where the plain words of a contract led to a meaning that flouts business common sense, that meaning must yield to a commercially sensible interpretation.8
[60] It is also important to have regard to what the Court cannot do on a contractual interpretation case.
[61] As the Privy Council has said:9
The court has no power to improve upon the instrument which it is called upon to construe, whether it be a contract, a statute or articles of association. It cannot introduce terms to make it fairer or more reasonable. It is concerned only to discover what the instrument means. However, that meaning is not necessarily or always what the authors or parties to the document would have intended. It is the meaning which the instrument would convey to a reasonable person having all the background knowledge which would reasonably be available to the audience to whom the instrument is addressed ...
[62] In a case where the parties to a contract for the sale and purchase of shares in a company have agreed on the particular criteria for that price to be ascertained, it is not for the Court to add a new or different criterion.
[63] The Privy Council said:10
It is true that in general terms the commercial objective was to agree an increase in the price if the development potential proved to be realisable. But the parties chose a specific criterion for demonstrating this to be the case. That criterion was that all necessary consents had been obtained. It is not for the courts to substitute a different criterion on the ground that it would satisfy the commercial objective equally well or better.
[64] In addition to construing the contract, this case also involves the question of whether words need to be implied into cl 9.8.
[65] Although they address the same problem, recent judicial pronouncements have suggested that the issues of contractual construction and the implication of terms are conceptually different.
[123] per Wilson J.
9 Attorney-General of Belize v Belize Telecom Ltd [2009] UKPC 10 at [16].
10 Canterbury Golf International Ltd v Yoshimoto [2002] UKPC 40 at [18].
[66] The UK Supreme Court in Marks & Spencer Plc v BNP Paribas said:11
Of course, it is fair to say that the factors to be taken into account on an issue of construction, namely the words used in the contract, the surrounding circumstances known to both parties at the time of the contract, commercial common sense, and the reasonable reader or reasonable parties, are also taken into account on an issue of implication. However, that does not mean that the exercise of implication should be properly classified as part of the exercise of interpretation, let alone that it should be carried out at the same time as interpretation. When one is implying a term or a phrase, one is not construing words, as the words to be implied are ex hypothesi not there to be construed; and to speak of construing the contract as a whole, including the implied terms, is not helpful, not least because it begs the question as to what construction actually means in this context.
[67] The New Zealand Supreme Court has discussed the extent to which the decision in Marks & Spencer Plc v BNP Paribas has changed the analysis of the Privy Council in Attorney-General of Belize v Belize Telecom Ltd. In the case of Mobil Oil NZ Ltd v Development Auckland Ltd,12 the Court noted that in New Zealand, implication arguments had, in the past, been determined as a matter of interpretation, giving as an example the decision of the Supreme Court in Nielsen v Dysart Timbers Ltd,13 but concluded that, following the decision of the UK Supreme Court in Marks & Spencer Plc v BNP Paribas, “[t]here is thus scope for argument whether adoption of the undiluted version of Lord Hoffmann’s interpretation approach is appropriate.”14
[68] However, they held in that case the issue is most sensibly addressed by way of interpretation rather than implication.
[69] In the recent decision of the Court of Appeal, Ward Equipment Ltd v Preston, Kós J analysed the difference between construction and implication in light of the Marks & Spencer decision.15 Kós J said:
[93] In the case of implication, it is important to start with the point that Belize Telecom remains authoritative in New Zealand. ... It has been suggested that Belize Telecom, embracing implication as part of construction, is more permissive of a term being implied. That complaint may however be doubted. Lord Carnwath at least was of clear opinion that Belize Telecom has
11 Marks & Spencer Plc v BNP Paribas [2015] UKSC 72 at [27].
12 Mobil Oil NZ Ltd v Development Auckland Ltd [2016] NZSC 89 at [80]- [83].
13 Nielsen v Dysart Timbers Ltd [2009] NZSC 43.
14 Above n 12, at [81].
15 Ward Equipment Ltd v Preston [2017] NZCA 444.
not watered down the traditional tests for implication of a term. (footnotes omitted).
[70] Kós J also confirmed that the five standard conditions for implication set out in BP Refinery (Westernport) Pty Ltd v Shire of Hastings16 remain applicable.17
Factual findings
[71] The evidence of Mr Murrie for TML was that he had never discussed cl 9.8 with either Mr Bradshaw or Mr Frame of Rangatira. Tuatara’s lawyer, Mr Bordignon, said that he had not done so either.
[72] Mr Bradshaw and Mr Frame said that Mr Murrie had expressed a concern that if the company was sold during the Contingent Sunset Period and before the EBITDA Hurdle was met, the vendors would miss out on the Contingent Payments.
[73] The relevant passage in Mr Bradshaw’s brief of evidence read:
I recall having various meetings, both face to face and over the phone with Sean and Bruno, before the first draft of the investment agreement was circulated. In these discussions, a concern was raised about the unlikely event that Rangatira and the other shareholders would sell the business before 31 March 2015 and before the EBITDA of $2m could be met. If a sale occurred in the first two years, Sean was concerned that he and the shareholders might miss out on the earnout. We agreed that, in that situation, it would be appropriate for Rangatira to pay the earnout and that this should form part of the agreement.
[74] The corresponding passage in Mr Frame’s evidence said:
It was also obvious that Sean was concerned that Rangatira might try to take advantage of a quick sale of shares to another buyer before the EBITDA Hurdle was met (prior to the end of the Contingent Sunset Date) and that therefore Sean (and the other shareholders) could miss out on the opportunity to obtain the Contingent Payments. This was a concern which Sean referred to frequently during the negotiations. He was particularly concerned given that the other party they had negotiated with (BRB) might still have been interested.
[75] The relevant passages of Mr Bordignon’s evidence are set out in [3] of his affidavit in reply sworn on 28 May 2017. He said:
16 BP Refinery (Westernport) Pty Ltd v Shire of Hastings [1994] 180 CLR 266 (PC) at 283.
17 Above n 15, at [94].
I cannot recall any discussions with Rangatira people at which I was present when the possibility of a future sellout of the company was mentioned.
The first I recall of a sellout possibility needing to be provided for in the draft Agreement was instructions I received from Sean about that after the commercial negotiations ended.
The only discussions I ever recall having about clause 8.8/9.8, or the purpose or reason for it, were with Sean.
[76] Mr Bordignon denied Mr Bradshaw’s claim that he had personally been involved in any discussions with him about this matter.
[77] The relevant passage in Mr Murrie’s evidence is found in his reply affidavit of 25 May 2017 at [2](d). He said:
I would probably also at some point have raised the possibility of a full sellout of the company in the future, because by then that was always going to be a potential event somewhere on the company’s horizon. Indeed, that was primarily why Rangatira was investing in us. However, I am also sure that we did not discuss that possibility in any detail or length at all, and it was never actively negotiated. I also do not think Bruno was present at such discussions.
[78] Mr Murrie went on to say at [3](a) of his reply affidavit:
Contrary to what Mr Frame and Mr Bradshaw say now, it was never discussed or intimated that either party expected that any such sellout would take place during the 18 month EBITDA timeframe.
[79] This evidential conflict needs to be resolved.
[80] The definition section of the agreement said:
Exit means the sale of all (or substantially all) the assets of the Company or all of the Shares of the Company.
[81] Therefore, in order for there to be an “Exit event” all the Tuatara shareholders would have to sell their shares. They presumably would not agree to do so if the offer had been made prior to the Contingent Sunset Date and prior to the EBITDA Hurdle having been reached unless an excellent offer had been received shortly after the parties had entered into the agreement but before the EBITDA Hurdle had been met.
[82] One inquiry which is of assistance in resolving the credibility issue in relation to the discussions between the parties is to the ascertain the extent to which it was
likely that Mr Murrie anticipated that there might be another offer to purchase all of the shares in Tuatara in the immediate future.
[83] Mr Murrie’s evidence was that the big breweries were always interested in acquiring the successful smaller craft breweries. Mr Murrie was of the view that, at the time of the agreement with Rangatira, one of the larger industry players might potentially have been prepared to pay a higher price per share for Tuatara than Rangatira was.
[84] A crucial piece of evidence on this point is an email that Mr Murrie sent to the other shareholders on 26 May 2013 very shortly before the deal with Rangatira was confirmed. The email started by saying:
Attached are documents relatin (sic) to the sale of 35% of Tuatara to Rangatira. We will know whether there is any other offer in the next couple of days, of which you will be advised, but in the meantime, can you please review the attached?
[85] Under cross-examination, Mr Murrie tried to explain this statement by saying that it referred to another offer from Rangatira. This simply does not make sense.
[86] The email of 26 May 2013 set out the offer that had just been received from Rangatira. The second paragraph of that email said:
Essentially Rangatira are buying 35% of the shares, at a grossed up $13M company valuation, ($12M actual). $1M is subject to the company posting a
$2M EBITDA profit in the next 2½ years on a rolling average basis. They are also putting cash into the company – 777K. The remainder goes to the shareholders, or $2.7M.
[87] Given that the email indicated that this proposed deal was scheduled for completion by the end of that week, it is not possible that Mr Murrie’s email was referring to another or different offer from Rangatira. Neither is there any support in the email for any suggestion that Mr Murrie might be inviting another offer from Rangatira. Instead, the email tends to indicate that the offer just received from Rangatira should be accepted. The last line of the email says:
The timing for completion is the end of this week (1 June) unless any serious concerns are raised.
[88] Mr Murrie also disclosed in a reply affidavit that the entity which the shareholders had previously been in negotiation with had offered to buy all of the shares in Tuatara in four years’ time. That was not the piece of information that had been disclosed to Rangatira at the time.
[89] The significance of all of this is that as at the date of the email of 26 May 2013, Mr Murrie was aware that an earlier suitor had already offered to buy all of the shareholding in the company within a few years and, even as the proposal from Rangatira was about to be accepted, was anticipating at least the possibility of a better offer from another entity within the next couple of days.
[90] It is therefore possible that at the time of his discussions with Mr Bradshaw and Mr Frame, Mr Murrie was applying his mind to the prospect that, after finalisation of the agreement with Rangatira and before the attainment of the EBITDA Hurdle, an offer might be made for all of the shares in Tuatara that the shareholders might wish to take advantage of. Because of the drag along rights in the company’s constitution,18 it seems plausible that Mr Murrie was, in fact, concerned that in the circumstances, Rangatira should be obliged to pay the Contingent Sums notwithstanding that the EBITDA Hurdle had not been met.
[91] Messrs Bradshaw and Frame were not shaken in cross-examination on this point and, by way of contrast, Mr Murrie’s claims that the reference in his email of 26 May 2017 was to another offer from Rangatira lacked credibility.
[92] Although Mr McIntosh, counsel for TML, (with some justification) challenged the admissibility of a number of aspects of the evidence of Mr Bradshaw and Mr Frame, their evidence about the conversation with Mr Murrie is not inadmissible as an impermissible subjective understanding of what a provision was meant to mean. It is their evidence on what was said to them by Mr Murrie and provides relevant background context. The Court is entitled to have regard to their evidence that such a conversation occurred.
18 Clause 10.1 of the company’s constitution provided that if 65 per cent or more of the shareholders proposed to sell their shares to a third party purchaser, they could drag along all of the shareholders.
[93] Another example of relevant background evidence is the drafting note inserted by Mr Bordignon in the first version of what became cl 9.8.
[94] The original draft of 27 March 2013 had inserted, at the end of cl 9.8 “Drafting note: not anticipated but inserted for completeness”. This raises the question of what was “not anticipated”.
[95] The position adopted by TML at the hearing was that, notwithstanding that the EBITDA Hurdle had not been met, if, at any stage in the future, the business was sold for more than $12 million, then the Contingent Sums were payable, even if this did not occur for many years in the future.
[96] Mr Murrie confirmed during cross-examination that it was “absolutely” his expectation that the company would be sold at some point in the future. He agreed that this was “a certainty”.
[97] It is impossible to reconcile Mr Murrie’s view as to the certainty of the sale of the company at some stage in the future with the drafting note inserted by Mr Bordignon that the event to which cl 9.8 related was “not anticipated”. It is far more likely that what Mr Bordignon thought was “not anticipated” was the sale of the business for more than $12 million prior to the Contingent Sunset Date.
[98] The proposition that, at the time of the agreement, the shareholders in Tuatara anticipated that, if the EBITDA Hurdle was not met, cl 9.8 would nevertheless operate in the future, even long after the Contingent Sunset Date had passed, to ensure that if there was a sale of above $12 million Rangatira would be liable to make the payments is implausible.
[99] On 26 March 2013 at 3.52pm, Mr Bradshaw from Rangatira sent Mr Bordignon what was described as “the earn-out numbers”. After setting out the numbers, and beneath the heading “Deferred Payment”, the text said: “Payable when 12 month moving average EBIT is $2.0 million or more and subject to this be (sic) achieved before 31 March 2015.” This document did not refer to the Exit event triggering the deferred payment.
[100] Although the spreadsheet was sent after Mr Bordignon had sent the first draft of the investment agreement, there was no subsequent comment from him suggesting that the Exit event would trigger liability beyond the Contingent Sunset Date.
[101] Counsel for TML referred to the absence of wording in cl 9.8 specifically referring to the Contingent Sunset Date and then stated:
The logical inference on the face of all of the foregoing therefore is that by including the Contingent Sunset Date expressly in cls 9.1, 9.7 and 10, but not doing so in either cl 9.8 or the definition of “Exit” when they so easily could have, the parties clearly thought about the issue. The presumption on the face of the contract as a whole must therefore be that they did not intend that the Exit event would be subject to that time limitation. (emphasis added)
[102] However, the claim that the absence of any specific reference to Contingent Sunset Date means that the parties “clearly thought about the issue” is improbable. It seems much more likely that the absence of reference in cl 9.8 to the Contingent Sunset Date was an oversight and that both parties understood that an Exit event had to happen prior to the Contingent Sunset Date to result in the obligation to pay.
Commercial objective
[103] In interpreting a commercial contract, the commercial objective which the parties sought to achieve is of significant relevance. Here the commercial objective was to facilitate the sale of shares to Rangatira at a price that reflected the actual value of those shares.
[104] However, it was the value of the shares at the time the agreement was entered into that was of critical importance, not the value of the shares potentially at some distant time in the future.
[105] The parties anticipated that the involvement of Rangatira, both by injecting additional capital into the company and providing governance expertise, would increase the value of the company. Those factors were operative immediately upon settlement. They would have inevitably impacted on the value of the company and would have been anticipated by both parties to have that effect.
[106] The reason that the earn-out provision was subject to a Sunset Date was so that it captured the value of the company at a point in time that had a connection with the date that the value of the company was to be ascertained. It would make no commercial sense at all, in terms of ascertaining the value of the company in mid- 2013, for an Exit event at a date far in the future to automatically trigger liability. There would be a disconnect between such an event and the parties’ commercial objective of providing a mechanism to ascertain a fair value of the company as at 2013.
[107] Mr McIntosh’s submissions said:
Here, the overall commercial objective was not on agreeing on any particular value, but instead on agreeing terms for Rangatira buying in, and that purpose is wholly unaffected by whether cl 9.8 is time-bound or not.
[108] This submission is untenable. The critical commercial objective of this transaction was to establish a fair value of the shares to facilitate the sale. The reason that the parties’ prior negotiations had broken down was because of their inability to agree on a fair value; that is why the mechanism of establishing share value was the key aspect of the agreement. Ascertaining the fair value had to be linked to the value at a particular date – in this case the value at or relatively soon after mid-2013.
[109] Mr Gollin for Rangatira, also referred to the concept of “financial equivalence” between the events triggering liability to make the Contingent Payments and said:
This financial equivalence between the Exit event and EBITDA Hurdle is only achieved if the same time limit (the Contingent Sunset Date) applies to both events as the EBITDA Hurdle and Exit event were proxies to “prove” the pre- money valuation of the company as $12m as at 2013. If the timeframe of the Exit event was not aligned with the EBITDA Hurdle and could continue on indefinitely, the equivalence of these events (and their status as proxies for each other) would be lost.
[110] There is significant force in that submission.
[111] TML’s response to that argument in its submissions was to say:
It is fully accepted that both contingent events were intended reflections of the agreed value of the company as at 2013 of $12m. But it is highly relevant that
$12m was the lowest value TML would accept at the time. Moreover, that value reflection was as far as the relationship between the two events went, because they were quite different things and independent of each other.
[112] However, while the shareholders in Tuatara believed that the company was worth $12 million in mid-2013, Rangatira did not. From Rangatira’s point of view, it was only if EBITDA could be demonstrated to have achieved $2 million per annum that it could be satisfied that the company was actually worth as much as $12 million. The EBITDA Hurdle and Exit event were two aspects of the same concept. Either the value of $12 million was established by the achievement of the EBITDA Hurdle or it was established by an Exit event which, notwithstanding that the EBITDA Hurdle had not yet been met, confirmed that a third party assessed the company’s value as being greater than $12 million. Both are different methods of establishing the value of the company at or shortly after the date the agreement was entered into. In this regard, they are proxies for one another. I therefore reject TML’s submission that “[t]hose two contingencies did not relate to each other ...”.
[113] In response to Rangatira’s arguments that it would have made no commercial sense for it to have agreed to an open-ended liability in relation to an Exit event, counsel for TML, in his written submissions said:
... the reality is, Rangatira simply would not have cared whether the clause was open-ended or not, because, on signing the Agreement, it would become almost irrelevant for Rangatira whether or not it ever had to pay the Contingent Payments.
[114] He also said:
Rangatira always expected to have to pay it anyway, so it would have immediately provisioned for it.
[115] Both these comments are speculation on the part of counsel.
[116] As to whether Rangatira would have “cared” whether the purchase price was
$10 million or $12 million, the evidence was that Rangatira is an experienced, sophisticated commercial investor. Its investment decisions were driven by a careful and rational analysis of the value of the entity they were investing in. They made objective rather than emotional decisions. If the value of what they were about to buy could be objectively demonstrated to be higher than their calculation demonstrated, they were prepared to accept that just as, when the EBITDA Hurdle agreed was not met, they did not accept that there was anything further to pay.
[117] TML’s submission that they “always expected to have to pay it anyway” has no evidential foundation.
[118] The contrary scenario to that submission is that Rangatira were investing in a business that had experienced a period of sustained growth and they realistically anticipated (as did the Tuatara shareholders) that this growth would continue, if not accelerate. They would also have expected that the additional capital that they injected into the company, and their governance expertise, would further assist with that growth and consequent increase in value.
[119] Although, at the time of the negotiations for the agreement, Rangatira was not aware that another suitor, who the Tuatara shareholders had been talking to about acquiring part of the company, had also offered to acquire the whole of the company four years after those discussions, it was aware that Tuatara was an attractive investment proposition and that other offers would have been likely.
[120] If the Exit event was not required to occur before the Contingent Sunset Date, there would be an increasing disconnect between the value of the business as at the date of the agreement in 2013 and whatever its value subsequently became.
[121] It is clear that the shareholders in Tuatara were absolutely convinced that the EBITDA Hurdle would be met, and indeed substantially exceeded, by the Contingent Sunset Date. There is no evidence that they applied their minds to devising a mechanism that would ensure that they still received the Contingent Payments at some stage in the future even if the EBITDA Hurdle was not met by the Contingent Sunset Date.
[122] On the contrary, as I have found, there is some evidence that they anticipated that the business might have been sold in the short term, before they had the opportunity to meet the EBITDA Hurdle, and wished to ensure that they did not lose the Contingent Payments in those circumstances.
[123] Looking at the commercial objective of the transaction and the surrounding circumstances, an informed bystander is likely to conclude that all of the provisions
of cl 9, including 9.8, were directed at establishing a fair purchase price for the shares in mid-2013 and that all the parts of cl 9 were intended by the parties to expire on the Contingent Sunset Date.
[124] I conclude that such an interpretation is commercially sensible and reject the submission of the alternative interpretation, which would require the Contingent Payments to be made potentially many years after the agreement, as not being commercially sensible. It is also inconsistent with the principal objective of both cl 9 and the agreement itself which was to establish a fair value for the company as at the date Rangatira acquired its shareholding rather than at some unspecified date potentially in the distant future.
Implied term
[125] As an alternative defence, Rangatira pleaded that there was an implied term in the agreement to the effect that:
(i) the mechanics of payment and the timeframe specified in cls 3.5 and
4.5 (the Contingent Sunset Date) must apply to the Exit event in cl 9.8; and
(ii) this implied term is either necessary for business efficacy or is so obvious that it goes without saying because if there is no link between the Exit event in cl 9.8 and cls 3.5 and 4.5, there is:
(aa) no payment mechanic for the Contingent Payments; and
(bb) no end date for the obligation to pay the Contingent Payments.
[126] In relation to the analysis of implied terms, the starting point is still the traditional five-point analysis from BP Refinery (Westernport) Pty Ltd v Shire of Hastings. There, the Privy Council said:19
... for a term to be implied, the following conditions (which may overlap) must be satisfied:
(1) it must be reasonable and equitable;
(2) it must be necessary to give business efficacy to the contract so that no term will be implied if the contract is effective without it;
(3) it must be so obvious that “it goes without saying”;
19 BP Refinery, above n 16, at 283.
(4) it must be capable of clear expression;
(5) it must not contradict any express term of the contract.
[127] The majority of the Court of Appeal in Ward Equipment Ltd v Preston acknowledged that the New Zealand Supreme Court had left open the issue of whether the implication of a term in a contract is to be dealt with by applying the same test and addressed as part of the same process for the interpretation of existing contractual terms. 20 The majority said that they preferred to express no view on the issue of the interface between construction, interpretation and implication. Kós J agreed with the substantive conclusions of the majority but also addressed the issue of whether the implication of a term is an exercise in contractual interpretation. Kós J seemed to favour an over-arching concept of “construction”. He said:21
In all disputes concerning the content of a contract, whether based on alleged incompleteness, ambiguity or error, the court’s task is the same. It is to identify the meaning of the contract. That task is called “construction”. That word and “interpretation” are often used interchangeably. But the better view may be that interpretation, implication and rectification are all techniques of construction.
[128] Kós J said that the five conditions for implication set out in BP Refinery:22
... will remain a prominent part of analysis where the construction advanced by a litigant involves a sufficiently substantial change to the express contractual words as to trigger the implication of a term.
[129] And:23
The lessons in all of this are these. Implication and interpretation are not the same. Implication is however part of construction. A coherent analysis of construction is logical and desirable, recognising that all its techniques – interpretation, rectification and implication of terms – are aimed at the same object, the ascertainment of meaning of a contract.
[130] I will therefore proceed on the basis that the implication of a term is a different exercise to the interpretation of a contract and that the test set out in BP Refinery is still relevant.
21 At [86].
22 At [94].
23 At [95].
[131] TML’s counsel responded to the implied term argument advanced by Rangatira by submitting:
Nothing in the language of cl 9.8, the Agreement overall or the relevant factual background suggests that the parties intended but have somehow failed to provide for a time constraint or payment mechanic for cl 9.8. Nor, ... is implication of such a term necessary to give business efficacy to cl 9.8 or the Agreement.
[132] Counsel also finished this passage of his submissions by saying “Rangatira is not entitled to have the Court rewrite that negotiated provision because it does not now like the commercial effect of it.”
[133] The claim that Rangatira wanted the Court to rewrite the agreement because it now did not like the commercial effect of it is misplaced. Rangatira relies on the traditional BP Refinery factors and says that, when those factors are applied to the present case, cl 9.8 should be modified with the addition of the implied words (underlined) so that it reads:
Exit event: if an Exit event occurs in the timeframe specified in cl 9.1 which actually or by implication values the Business or the Company at greater than
$12 million, then the Contingent Payments shall be immediately due and payable.
[134] As to business efficacy and the need for such an implied term, Rangatira’s counsel said:
If the plaintiff’s interpretation is correct and cl 9.8 is a standalone clause with no link to cls 3.5 and 4.5 (which are limited by the Contingent Sunset Date), there is no payment mechanic. Clause 9.8 merely says that “if an Exit event occurs which actually or by implication values the Business or the Company at greater than $12 million, then the Contingent Payments shall become immediately due and payable.” The payment mechanics, (that is, the provisions which say “the Purchaser shall pay” and to whom) are not in cl 9.8.
[135] The submissions go on to note that the payment mechanics for the Contingent Payments are only found in cls 3.5 and 4.5.
[136] Counsel also submits that one of the factors supporting a conclusion that the term sought to be implied is so obvious it goes without saying is:
The primary indication that cl 9.8 is placed as part of cl 9.1 which deals with earning the Contingent Payments on meeting the EBITDA Hurdle prior to the
Contingent Sunset Date. There is a clear rationale for a link between cls 9.1 and 9.8 ....
[137] And further:
The use of the word “Contingent” in “Contingent Payments” and “Contingent Sunset Date” also strongly suggests that no matter what event triggers the Contingent Payments, they are limited by the Contingent Sunset Date.
[138] Counsel also referred to the commercial purpose of the transaction and the financial equivalence between achieving the EBITDA Hurdle and the $12 million figure for the Exit event.
[139] The submission was that the two events were in effect proxies for each other to establish value and that, as valuations of a company are always referable to a point in time, the financial equivalence only made sense if the EBITDA Hurdle and Exit event had the same timeframe.
[140] I accept that the Court’s jurisdiction to imply a term is to be used cautiously and sparingly. However, I am satisfied that this is an appropriate case to imply the term sought by Rangatira for the reasons advanced by counsel for Rangatira as set out above.
[141] In light of the commercial objective of cl 9 and the Agreement as a whole, which was to facilitate the sale of a 35 per cent shareholding in Tuatara to Rangatira at a fair value, I find the implied term was reasonable and equitable.
[142] I also accept the arguments advanced by Rangatira as to business efficacy. The proposed term needs to be implied in order to make the agreement effective. Without it, the agreement would not achieve the commercial objective of facilitating acquisition of the shares at a fair price in 2013. The proposed term is capable of clear expression and does not contradict any expressed term of the contract.
[143] Given that the commercial purpose of the agreement was to fix the value of the shares for acquisition as at a particular date, I find that an objective and informed observer would say “it goes without saying” that all of the mechanisms for establishing
value set out in cl 9, including cl 9.8, are obviously subject to the Contingent Sunset Date.
[144] Although the issue of whether the EBITDA Hurdle had been met was not disputed before the Court in this case, given the evident lingering unhappiness of the Tuatara shareholders over the circumstances in which the EBITDA Hurdle was not met, I suspect that the raising of the claim that cl 9.8 applied forever in the future and did not end at the Contingent Sunset Date reflects an attempt by the shareholders to achieve by another route an outcome of which they felt that they had wrongly been deprived.
Costs
[145] The defendant, having been successful in both proceedings and the summary judgment application, is entitled to costs.
[146] Mr McIntosh submitted that costs be reserved and indicated there were a number of costs issues he wished to address.
[147] I invite the parties to settle costs. However, if they are unable to do that, I direct that the defendant file a memorandum in support of any costs application within 14 days from the date of this decision, with the plaintiff having 14 days from receipt of the defendant’s memorandum to respond.
[148] Costs memoranda are not to exceed 10 pages.
Churchman J
Solicitors:
Dew & Company Limited, Blenheim for Plaintiff Minter Ellison Rudd Watts, Auckland for Defendant
NZLII:
Copyright Policy
|
Disclaimers
|
Privacy Policy
|
Feedback
URL: http://www.nzlii.org/nz/cases/NZHC/2018/816.html